INFLATION:

The overall general upward price movement of goods and services in an economy (often
caused by a increase in the supply of money), usually as measured by the Consumer Price
Index and the Producer Price Index. Over time, as the cost of goods and services increase,
the value of a dollar is going to fall because a person won't be able to purchase as much
with that dollar as he/she previously could. While the annual rate of inflation has
fluctuated greatly over the last half century, ranging from nearly zero inflation to 23%
inflation, the Fed actively tries to maintain a specific rate of inflation, which is usually 2-
3% but can vary depending on circumstances. opposite of deflation.

CAUSES OF INFLATION

Inflation is its peak all over the world and there are different reasons for it. In the case of
Asian country, Pakistan Inflation is the result of monetary phenomenon. The reason is
that excess money supply growth in Pakistan has basically enhanced inflation in Pakistan.
According to monetary policy announced recently in Pakistan, the CPI of Pakistan has
dropped to 19.1% in March 2009 as compared to 25% in August 2008. But still inflation
is very high as compared to the desirable level. Inflation has also risen because of
increasing costs like wages. Moreover, the international increase of commodity prices,
external shocks, worsening exchange rate and exhaustion of natural resources have also
contributed significantly in enhancing inflation

It has been generally agreed by the economists that high rates of inflation and
hyperinflation are caused by an excessive growth in the supply of money. Today, most
economists favour a low steady rate of inflation. Low (as opposed to zero or negative)
inflation may reduce the severity of economic recessions by enabling the labor market to
adjust more quickly in a downturn, and reduce the risk that a liquidity trap prevents
monetary policy from stabilising the economy. The task of keeping the rate of inflation
low and stable is usually given to monetary authorities. Generally, these monetary
authorities are the central banks that control the size of the money supply through the
setting of interest rates, through open market operations, and through the setting of
banking reserve requirements

Another common reason of inflation is a rise in production costs, which leads to an

increase in the price of the final product. For example, if raw materials increase in price,
this leads to the cost of production increasing, this in turn leads to the company
increasing prices to maintain their profits, this kind of inflation is call cost-push inflation.

rising labour costs can also lead to inflation, because workers demand wage increases,
and companies usually chose to pass on those costs to their customers, this sort of
inflation is called wage-push inflation.

Inflation can also be caused by international lending and national debts. As nations
borrow money, they have to deal with interests, which in the end cause prices to rise as a
way of keeping up with their debts. A deep drop of the exchange rate can also result in
inflation, as governments will have to deal with differences in the import/export level.

Finally, inflation can also be caused by federal taxes put on consumer products. As the
taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that
once prices have increased, they rarely go back, even if the taxes are later reduced.

Inflation can also be caused by international lending and national debts. As nations
borrow money, they have to deal with interests, which in the end cause prices to rise as a
way of keeping up with their debts. A deep drop of the exchange rate can also result in
inflation, as governments will have to deal with differences in the import/export level.

Finally, inflation can also be caused by federal taxes put on consumer products. As the
taxes rise, suppliers often pass on the burden to the consumer; the catch, however, is that
once prices have increased, they rarely go back, even if the taxes are later reduced.